De-Valued: Value America bosses settle claims

Fiveyears after a holiday-season wave of layoffs had over 300 Value America employees packing their cubicles, a class action suit against the company's officers has been settled.

But if the $4.6 million deal helps some investors feel better about losing their shirts, the lawyers– who take a third of the payout– may be the only ones laughing all the way to the bank.

"It's miniscule," says former Value America employee Kirby Hutto of his portion of the settlement.

Indeed. In April 1999, Value America stock went public at $23 per share. The terms of the settlement offer plaintiffs an average of six cents per share.

Someone who purchased 1,000 shares at the offering– a $23,000 investment– nets $60 from the settlement, not exactly a pretty penny. For those frenzied buyers who got in after the opening bell, the relative compensation is even skimpier.

But Hutto's not complaining.

"If the guys who skated with the millions are having to give a couple million back right now," says Hutto, "I'll file my papers. It's just the principle of the thing."

The stock price shot up the day of the IPO over $74– making Value America founder Craig Winn a momentary billionaire. That, however, was as high it went– and a precipitous slide ensued.

The four Value America execs named in the suit are Winn, Thomas Morgan, Rex Scatena, and Dean Johnson. Winn and Scatena could not be reached for comment; Neither Johnson, Morgan nor the defense attorneys returned the Hook's calls.

The suit claimed that all four men managed to dump shares and make millions while the investors they allegedly duped were watching their money disappear. The settlement agreement, finalized in August, reveals that plaintiffs believed there was a chance they would not have prevailed in a courtroom.

Before its slide to oblivion, many people thought Value America could herald a new digital age. The concept was simple: provide one-stop online shopping for nearly any product under the sun. Need a vacuum? Value America! Need a refrigerator? Value America! While the company even sold freeze-dried soup, computers were its bread and butter.

Even while the company was burning through cash, Winn was persuading new investors to come on board. Bigwigs handing money to Winn and company included Microsoft's Paul Allen ($65 million) and FedEx CEO Fred Smith ($15 million), whose son joined the company in 1999 after his suspension from UVA on assault charges.

After beginning operations in headquarters on Commonwealth Drive, Value America soon sprawled into offices all over town. In 1999, company bigwigs planned to buy White Gables, a 1920s estate on Ivy Road, but the deal fell through, paving the way for what is now a condo development.

But while Value America expanded, so did flaws in its business plan. Because it kept no inventory– products were shipped directly from hundreds of manufacturers– fulfillment was problematic and erratic.

Confused, some customers returned their products directly to Value America instead of to the manufacturer– only to wait in vain for a refund or even a reply. At one point, according to a former employee, boxes of returned merchandise piled to the ceiling of the main office because no one knew what to do with them.

The Fearless Consumer, now a Hook column, featured one miserable eve-of-bankruptcy experience in which Value America cashed the check of a customer in India– and never sent the promised computer.

In his book, dot.bomb, former Value America exec David Kuo says Winn's hubris was at the center of the storm. He recounts Winn's meetings with investors and also with his own employees, who scrambled to raise $500,000 to keep their employer afloat. Yet while Winn was encouraging his own workforce to invest their hard-earned cash, he was slowly unloading his own shares– to the tune of over $50 million.

Kuo wasn't the only one to make a book out of the fiasco. Winn penned In the Company of Good and Evil, a glowing recollection of his role in Value America and its undoing by people he publicly branded "scumbags"– all in under 700 pages.

The tome, whose cover features a woman's hand– nails decorated crimson red– holding a cigar, blames the company's failure on executives such as former IBM honcho Glenda Dorchak. [The printed version of this story contained an error here which has been removed in this online version.–editor]

In the book, co-written in the third person with Ken Power, one of the company's five founders, Winn is painted as a visionary who made one fatal mistake: trusting those who didn't share his dream.

"Alone in his office, Craig reflected it's not about history. It's about the future, about meeting and exceeding expectations. It had always been his policy to under-promise and over-deliver."

For those who took a financial beating in a Value America investment, Winn's delivery fell short. The ignominious end came in November 2000, when the company's assets were sold by Bid4Assets. It was around that time that Winn– considered by some to be an architect of corporate misery– earned a link on the corporate humor site despair.com. (The site connects to the May 1, 2000 Business Week cover story on Winn and the demise of Value America.)

While several Value America investors declined the Hook's request for comment, citing a wish to avoid "dragging up bad feelings," Hutto says some good came out of his "insane" time at Value America.

"You couldn't pack that much experience into a two-year time frame with any other type of job," he says. "I wouldn't trade it, but I don't think I would do it again."

2001 also saw the self-published telling of the founder's business woes.PHOTO BY JEN FARIELLO

This 2001 title by David Kuo recounts the collapse.PHOTO BY JEN FARIELLO